Apparently, June is Innovation Month in New England. So I thought I would write a bit about one of the perplexing things about cleantech investing in New England.
Now, every region ends up being a bit self-centered at times, and New England is certainly no exception. But it's a commonly-held and oft-stated position among those involved in energytech innovation in this region that "Massachusetts is THE world-class center of research in energy and clean technologies".
If you are one of those who takes this kind of statement literally, then it probably comes as some surprise to then see that California typically attracts significantly more cleantech venture dollars than Massachusetts, and even New England overall. I've been part of meetings with investors and other industry participants here in the Boston area where the goal is put out there that Massachusetts should -- especially given its primacy in energy R&D! -- be able to top or at least equal California in terms of cleantech entrepreneurial activity. And for lack of other trackable statistics, the disparity in cleantech venture capital spending is then lamented as a sign that Massachusetts is "falling behind."
I've been one to say such things myself at times. Being here, surrounded by so many great researchers in so many varied energy and clean technology fields, really does give one the sense of being in a world-class research cluster that is second-to-none. And then, as an investor, when I find myself inevitably investing on the west coast, I start wondering "Why?"
Why do I seem to generally find California a better place to invest in (when I'm wearing my VC hat, versus my other private equity roles), when there's so much innovation around here? Is it that that's where the dominant amount of cleantech venture dollars are sitting, and therefore more entrepreneurs go there? Is it something about a disparity in entrepreneurial culture in general between the regions? Is it just that MIT researchers hate venture capital while many California researchers seek it? In other words, is there something "wrong" with Massachusetts (from a self-centered VC point of view)? Or is it simply that California is so much bigger than Massachusetts, in terms of people and economy, so research cluster or not is a moot question?
I decided to take a really quick look into the question. Starting with cleantech patents. I wanted to test the theory that innovation is just as prevalent here as it is in California, and started naturally with patents as a proxy. I couldn't find anyone who had already done this analysis the way I wanted it done (there are some cleantech patent tracking efforts out there, but I can't really get a tangible understanding of their methodologies, and they don't have the state-level breakdowns the way I wanted it), so I went to an online patent search engine and started searching for all published patents from 2007 to the present, with at least one inventor in the searched-for state (CA, MA, and NY). I didn't scrub the results at all, because I wasn't looking for 100% absolutely accurate totals, I was simply looking for comparisons across regions. Here's what I found:
As you can see, not only does it appear that California dramatically outpaced Massachusetts in terms of published cleantech patents over the past few years, but MA is even mostly behind New York state as well. This is pretty damaging to all those Mass-philes out there who claim that this is the dominant place for cleantech innovation. To put it another way, if you're a cleantech VC, looking at the above tallies, would you rather be in Massachusetts or California? Or even New York state?
Now two big caveats: First of all not all patents are created equal. This is just an unscrubbed tally of patents based on very simple search terms, and it might be that the 3 most important photovoltaic patents during this period, from an investor standpoint, were all in Massachusetts. Or perhaps in NY, for example, a higher proportion of these patents were claimed by large corporate research arms (ie: GE) and therefore aren't accessible to venture investors. So the above tallies might not tell the full story. But even still -- there's a wide gulf between the number of cleantech patents published in California and Massachusetts.
Secondly, patents aren't a full proxy for innovation. They're just a proxy of applied innovation. For the most part, basic science research results in papers, not patents.
In fact, I would argue that there's an important distinction between Research and Innovation. Let me propose a taxonomy of sorts: "Research" helps uncover basic principles, or invent entire new technology innovation areas. "Innovation" is the application of those principles to the development of new, commercializable, patentable technology. And then "Commercialization", the productization of that innovation and the introduction of those products to the market, is where venture and corporate capital is supposed to plug in.
So the answer might be that Massachusetts is indeed a dominant center of excellence for energy research -- but fundamental Research, not patentable technology Innovation.
This is, in fact, what I believe to be happening. For instance, in the 2007 US Department of Energy budget, California universities and colleges received $100M in DOE support (mostly grants from the Office of Science, very basic research), whereas Massachusetts universities and colleges received $78M, a much closer amount (NY state, btw, received $84M). And if you could map that out, I bet a 100 mile radius centered around Boston would end up being the top academic research dollar garnering area of comparable size, compared to California and New York state where the research institutions are much more spread out. It's just one small slice of the cleantech research picture, but it does start to lend some credence to what I and others are sensing anecdotally -- that Massachusetts really is a world-class center of basic academic cleantech Research.
But basic Research. Not Innovations ready to be Commercialized within a venture capital type time period.
So let's go back to the original question about cleantech venture capital... In light of the above analysis, New Englanders should celebrate the fact that the region is receiving almost as much attention as the west coast in terms of early stage cleantech venture capital. I looked it up, and thanks to the Cleantech Group's new data format for members (really a terrific job of data presentation, I absolutely love this new sortable format, kudos to them), I was able to look only at "early stage" (ie: 1st round) financings within each region:
In terms of dollars tracked by the Cleantech Group, the Northeast is only about half of the West Coast, but in terms of number of deals they're actually pretty comparable. And as long-time readers know, because of the really broad range of capital-intensity across sectors and business models within cleantech, I always say that the number of deals, and not the dollars, is a much more accurate indicator of venture investment activity. So the Northeast overall is right up there with the West Coast in terms of venture investments in cleantech innovation.
So Beat L.A.! and all that... Massachusetts can declare (near) victory and walk away happy from this analysis, right?
Sort of. I actually think what I may have identified is an unsustainable trend in the region. If the patent-level innovation shows such a wide disparity, but the venture investments and research dollars look much more similar in number, one of three things is happening.
1. New England innovations, on a per-patent basis, are much more valuable than West Coast innovations.
2. New England cleantech investors have been harvesting available patentable innovations at a comparable rate to West Coast investors, but with a shallower pool to work from, so are going to hit diminishing returns much sooner.
3. New England cleantech investors have been more eager than West Coast investors (on average) to put venture dollars into more basic research efforts that are further away from commercialization.
The first one is probably nonsense. And the second two possible scenarios (which aren't mutually exclusive, btw) are unsustainable. When coupled with the fact that, anecdotally at least, the Boston cleantech venture capital community is rapidly shrinking and spending a lot of time on airplanes right now, it paints a picture that's less happy looking forward.
In other words, those who want to see a continued vibrant cleantech innovation-based economy in Massachusetts should be pretty pleased with how the region has performed to date, in comparison with California and other regions. No doubt greatly helped by strongly supportive government policy at the state level. And they should be proud of the world-class energy technology research being undertaken here. But they should also be concerned about the fact that there appears to be a possible disconnect between the large amount of brilliant basic energy Research being done here, and a relatively low amount of commercializable Innovation development being undertaken.
To put it another way, there's an important R&D step between fundamental Research and venture-backed or corporate-driven Commercialization of new clean technologies, and in Massachusetts there's some evidence that this Innovation step is a relative weakness, at least when compared to some other top regions (it's not like Massachusetts is an absolute laggard or anything, but you get my point).
Massachusetts needs to be thinking about how to better hand-off all this fundamental science Research to the engineering-based Innovator community (which could be either internal or external to the research's academic setting) that can drive it closer to actual Commercialization.
Or else the research will go elsewhere for commercialization -- or worse, go nowhere.